Premium Allocation Approach

Transcription

1 Premium Allocation Approach Insurance IFRS Seminar December 1, 2016 Bill Horbatt Darryl Wagner, FSA, MAAA Session 21

2 Agenda Premium Allocation Approach Subsequent measurement 2

3 Premium Allocation Approach An entity may simplify the measurement of the liability for the remaining coverage (known in the 2010 ED as the pre-claims liability ) using the premium-allocation approach if Doing so would produce a measurement that is a reasonable approximation to that which would be produced when applying the building block approach; The coverage period at initial recognition is approximately one year or less. Pre-claims liability is the insurer s stand ready obligation to pay claims for future insured events arising under existing contracts. When an entity uses the simplified approach, it shall recognize an onerous contract liability (the difference between the liability and the fulfillment cash flow), if, at initial recognition or subsequently, the portfolio of the contracts containing the contract is onerous. A portfolio of insurance contracts is onerous if, after the entity is bound by the terms of the contract, the sum of the fulfillment cash flows and any pre-coverage cash flows is greater than zero. The pre-claims liability at initial recognition is the premium received at initial recognition, less the directly attributable acquisition costs and plus any onerous liability. Consistent with the general measurement model, a current market discount rate would be used in discounting the pre-claims liability (note practical expedient). 3

4 Modified approach subsequent measurement Pre-claims liability for subsequent reporting period is the previous carrying amount: Plus the premium received in the period; Minus the amount recognized as insurance contract revenue for coverage provided in the period Plus any onerous liability recognized during the period Plus (or minus) the effect of any changes in estimates that relate to any onerous liability recognized in previous periods Plus any adjustment to reflect the time value of money. 4

5 Premium Allocation Approach Proposals in Original ED/DP FASB and IASB introduced the modified approach as an alternative model for certain short duration contracts Initial pre-claims liability is premiums received less directly attributable acquisition costs Pre-claims liability is reduced/amortized over the coverage period Onerous contract test required each period Liabilities for claims incurred would be measured at the present value of fulfillment cash flows using building blocks 1 and 2 Proposals in the 2013 ED IASB: is permitted as a simplification to FASB: is required based on comprehensive eligibility criteria Quantitative onerous contract test and reflection of onerous liability in the preclaims liability Discount cash flows if there is a significant financing element; however, there is a practical expedient to not require discounting for contracts that have a duration of 12 months or less at inception 5

6 Comparison of Eligibility Criteria Objective IASB Eligible for if measurements are reasonable approximation to. FASB Insured should apply the instead of, if certain specific criteria are met. Practical Expedient Permit/ Require Eligibility Requirements Contract meets the objective if the coverage period is one year or less. permitted but not required The principles based objective does not provide for eligibility requirements. IASB agreed to application guidance consistent with the FASB s eligibility requirements however this would not be included in the main body of the final standard. Contract is within scope of the if coverage period is one year or less. required for contracts not eligible. Apply the if, at contract inception, either condition is met: a) During the period before a claim is incurred, it is unlikely there will be a significant change in the CFs required to fulfill the contract; or, b) The coverage period of the insurance contract is one year or less 6

7 Comparison of Eligibility Criteria Application Guidance IASB Contracts would not produce comparable measurements if, at contract inception, either condition is met: [Same as FASB Eligibility Criteria] (a)it is likely that, during the period before a claim is incurred, there will be a significant change in the CFs required to fulfill the contract; or, (b)significant judgment is required to allocate the premium to the insurer s obligation in each reporting period. Uncertainty examples include: premium that would reflect the exposure and risk for each reporting period; or length of the coverage period. Example contracts would not be included as application guidance. FASB The following are indicators that the eligibility criteria for are met: a) Existence of guarantees or options may indicate there is likely to be a significant change in CFs, unless substantially offset by variations in premiums. b) Changes in circumstances will not always significantly change the CFs. Other circumstances are not likely at contract inception. c) Significant change in premium pricing for future contracts with similar or identical risks could indicate a significant change in the CFs. d) The longer the coverage period of a contract, the more likely it is that there will be a significant change in the CFs. Refer to the FASB ED for specific examples. 7

8 IASB Measurement Model CSM BB3 = = = CSM remaining coverage incurred claims Day 0 Acquisition Costs BB Building Block Building Block Approach LEGEND Premium Allocation Approach Risk Adjustment Coverage Period CSM* Contractual Service Margin End of Coverage Unearned Premium Reserve, or Pre- Claims Liability * CSM can be unlocked for favorable and unfavorable changes, resulting in a CSM that can increase and decrease. 8

9 FASB Measurement Model SM BB3 remaining coverage incurred claims = = SM The single margin relates to both incurred claims and remaining coverage CFs. remaining coverage incurred claims SM Day 0 Acquisition Costs BB Building Block Building Block Approach LEGEND Premium Allocation Approach Risk Adjustment SM* Single Margin Coverage Period End of Coverage Unearned Premium Reserve, or Preclaims Liability * There is no explicit unlocking adjustment SM subsequent to initial recognition. Note that the SM equals building block 3 in the FASB model. 9

10 Thank You